The bullet holes in my hat

While I usually applaud the Fed actions with one of my hands my other hand is examining the holes that Bernanke shooting made in my hat. While last year was incredibly profitable for my portfolio this year I’m up by 1% to 3%, almost flat. Each time Feds step in with unexpected rate cut I’m losing a bunch on my shorts.

I think the smart cowboy is the one who hides when he knows that his opponent will run out of bullets first. I think Feds have only 4 bullets left – they won’t drop the rates below 2% before the global recession starts, if ever. Besides shooting bullets they are throwing knives and stones (like saving Bear today), when they run out of stones they’ll probably fart something toxic 🙂

Anyway, I want them to finish their game before I step in. My plan is to increase my cash position to 50% and keep it like that until the Fed Funds rate is set at 2.25%

T , 229 billion as per their 10-k. That’s what they said they owe other parties. So , that’s the backstop. So , the balance sheet for the Fed before TAF started was about 800 billion. TAF is now 200 billion. TSLF is another 200 billion and the BSC backstop 229 more. Looks like the Fed has about 170 plus billion to work with and about 200 bps in cuts… they’re running out of bullets quickly. And the full brunt of the storm hasn’t hit yet.

Sorry,
Dodged all the bullets this week. Possibly one of my best weeks. Tuesdays are bad days. Monday this week may be a bad day for anyone trying to make a buck in the market. I get the feeling there will be 2am pizza delivery to the FRNY Saturday and Sunday.

9. T , TAF was increased from 60 billion to 100 month on March 7th. I misspoke about TAF itself being 200 billion , but the Fed also added 100 billion in 28 day repos for the depository banks. Sorry for any confusion. The better way to have stated that would have been to say Fed support was increased to an amount that will equal 200 billion once all of the repos are in place. TSLF was announced this past Tuesday at 200 billion so that part was clear.

I think you might be incorrect in assuming that the Fed will stop at 2%. My guess is that Helicopter Ben may decide to go down to 1%. If that turns out to be the case, then the rate cuts will be as follows:

All this money being thrown around by the Fed has to really cause something to get disjoint.

What I see is that the Fed is pushing down the near yields, and using some of the money to hold down long yields, witness some of the action around the treasury auction of late. What may be coming is a steepening of the yield when the Fed runs out of control of the long yields. An indication of this is the recent negative yield for TIPs where the inflation fears are getting blown out.

We may see a 1% yield for the 1 year or less and a 10% yield for the 10 year. The fed needs to contain the long bond if they hope to revive housing, but I don’t think that they can. The problem now is saving the banks. If they cannot save the banks, then what?

12. Shankar , I agree we may get to 1-1.5 on the Fed Fund before Ben runs out of bullets. I think we see 75 to 100 bps Tuesday and the Fed further cuts in the April meeting. What’s interesting to me is how short the pallative period has become for beneficial effects of the Fed cuts… it seems to peel off like water off a duck’s back. If things folow form , the market will be gasping , begging , screaming for an intermeeting cut by early April. Price in 50 to 75 bps for April ( that puts us at FF range of 1.25-1.75 by the end of April. )By the way , the max pain period for resets doesn’t hit until late summer and the lag from reset to foreclosure would probably cover 9-12 months depending on state laws , various Home Saver Programs , mod attempts etc. By the time the force hits fully in about a year , rate cuts will have been off the table for quite some time. One question though , if you expect a large rate cut on Tuesday , right go short ahead of the cut ? Why not go flat , wait for the expected pop in financial / tech / Dow stocks or whatever you want to short , let the exuberance fade and then go short ?

I think the discussion on when and if Feds will go below 2% is extremely complicated. It may actually hurt the long rates as PrintFaster said.

From the investment prospective, I also agree that the investor’s excitement will fade with rates around 2%. It may show Fed’s panic. Initial cuts show that Feds are concerned, late cuts show that they are not just concerned, they panic.

But it could be a political reason. Bernanke knows that it’s unlikely anyone will point a finger on him later on if he cuts promptly. He probably has tons of ideas and is unlikely to want to retire early 🙂

The 1 Mo, 3, Mo are at 1.20%, the 6 Mo is at 1.33% and the 2 year is at 1.5%. It looks like the market expects the Fed to cut rates to at least 1.5%. On Friday, on Bloomberg Radio, I heard from a bond trader, that the bond traders all expect the Fed to cut rates to 1.5% by May.

Since its unlikely that the fed will raise interest rates, I can only come to one conclusion. The US Dollar will fall. If they do end up cutting rates to 1.5% I think there is a good chance we will see the DLY in the 50’s, and Oil above $125 bbl. If the dollar does fall into the 50’s the Middle East exports will be forced to decouple from the USD, and might start asking for Oil in Euros or “non US Dollar” currencies. Already many OPEC exporters except payment in non US currencies. For now they still accepting US Dollars, but for how much longer if the dollar keeps falling.

Of Course, Greenspan has been adding fuel to the burning dollars with his speech in the Middle east. Telling OPEC to decouple from the dollar. Whats next, is he going to advice them to price Oil in Euros?

Back in Dec Saudi Arabia announced that they would decouple from the USD if the value fell by a third. If that happens we’ll see fuel shortages and gas lines like the 1970’s. At that point you can kiss the american economy good-bye.

theroxylandr wrote:

“Bernanke knows that it’s unlikely anyone will point a finger on him later on if he cuts promptly. He probably has tons of ideas and is unlikely to want to retire early.”

Bernanke is the fall guy. When the price of Oil rises to $125 bbl and there are gas lines everywhere, Congress is going to ask why he cut rates so fast that caused the US dollar to lose its status as the World’s reserve currency. Bernanke doesn’t have a clue how close we are to the edge. I believe Benanke will be gone in 2009 or sooner.

15 , T… Investor excitement with Fed cuts has already faded. The recent aggregate 125 bps cuts ( emergency and regular meeting cuts of 1/22 and 1/28 )didn’t have any staying power. Now fed cuts are viewed more as a strung junkie views an overdue fix. They’re consumed and almost immediately the next fix is needed by the junkie. Ben will cut March , April and June. We have to see how low the Fed fund rate is after the June cut to see what happens next.

It’s like training Pavlov’s dog. Every time the market is about go into free fall and traders short everything. Bernarke fires his gun and blows the shorts off the traders. He’s hoping to train them not to do this. But as the blog points out, he’s only got like 5 bullets left.